Money Laundering: Managing Critical Risk
A primary responsibility of the Federal Reserve System is to provide a safe and sound banking system through a comprehensive bank supervision program. To maintain the publics confidence in the banking system and avoid perceptions that banks services might be facilitating criminal or terrorist activity, the Federal Reserve and the other banking supervisory agencies have long required banks to maintain systems to deter and detect money laundering, which is the processing of financial assets to disguise their illegal origins.
This effort has taken on heightened importance since the
passage of the USA Patriot Act in October 2001, which added
new requirements to anti-money-laundering laws and expanded
these requirements to cover more financial institutions.
Greater risks than ever
The risks to financial institutions of not having a robust anti-money-laundering program are much greater now than they ever have been. Since 9/11, law enforcement has focused more intensely on this area. Banking supervisory agencies are assessing programs effectiveness more carefully during examinations, and as a result they are making more recommendations for program improvements and are issuing more enforcement actions for serious deficiencies.
The Patriot Act also now requires banking supervisory agencies to consider the adequacy of a banks anti-money-laundering program in evaluating applications requiring regulatory approval; this requirement has caused some applications to be delayed or withdrawn. Additionally, the Financial Crimes Enforcement Network (FinCEN), the Treasury agency responsible for overseeing U.S. anti-money-laundering laws, has more actively exercised its enforcement powers, imposing significant monetary penalties on financial institutions for program deficiencies. The risks of enforcement actions, civil money penalties, delays in expansion plans, and reputational damage demand active management.
Managing the risks
To manage these risks, every financial institution needs to have a dynamic anti-money-laundering program that assigns accountability for risk management, trains staff on an ongoing basis, provides for independent testing of the program, and institutes a comprehensive system of internal controls.
Foremost among these internal controls should be a strong process for identifying and reporting suspicious activity in accordance with regulatory requirements. For larger institutions automated systems are most likely necessary to support the programs demands on management information systems. Of course, senior managements support is always a key component for every institution to have a strong risk management program.
Although such programs are not necessarily easy or inexpensive, they are critical to the ongoing success not only of a financial institution but of the financial system as a whole, especially in todays environment.
By John Atkinson, Supervision and Regulation